UGANDA’S USE OF INCENTIVES FOR RENEWABLE POWER GENERATION
16 April 2016
Electricity Sector Overview
Uganda’s electricity industry is regulated by the Electricity Regulatory Authority (ERA), established by the Electricity Act of 1999. ERA’s duties include the regulation and issuance of licences for the generation, transmission, distribution, sale, export and import of electrical energy.
The electricity generation sector has several independent power producers, whose energy is purchased by the government owned Uganda Electricity Transmission Company Limited (“UETCL”). UETCL is the transmission system operator and single bulk purchaser of electricity, which is distributed by Umeme Limited, a private company that holds the concession for the distribution of power.
Introduction of Renewable Energy Feed‐in Tariffs
To promote increased private sector investment in power generation from renewable sources, Uganda adopted the renewable energy feed‐in tariffs (“REFIT”) in 2007. The REFIT is a mechanism that offers developers of energy from eligible renewable sources guaranteed off‐take of generated energy under long term contracts at a predetermined price that is linked to the cost of production attributed to such technology. Uganda’s REFIT was established through the Uganda Renewable Energy Policy of 2007. It is managed by ERA, whose responsibilities in that regard include the issuance of REFIT guidelines, establishment and review of the tariff structure and administering of the feed‐in tariff.
In the first couple of years of its introduction, the REFIT had limited success in attracting developers. It has as a result been revised and updated at intervals in a bid to boost its fortunes. A revision carried out in 2010 marked the start of what is now referred to as Phase 2 of the REFIT, with the introduction of REFIT Guidelines and a revised tariff that is based on updated levelised costs of production. On 15 November 2012 the REFIT Guidelines were revised by ERA, which issued the Uganda Renewable Energy Feed‐in Tariff Phase 2 Guidelines (“the 2012 Guidelines”), which currently provide the applicable policy framework.
Principles of the REFIT
The main principles and characteristics of the REFIT under the 2012 Guidelines include the following:
- A fast tracked application and administrative process;
- A guaranteed purchase price for a fixed duration and a stepped tariff for different priority technologies;
- A gradual tariff reduction for new projects on account of learning effects and cost reductions;
- Guaranteed access to the transmission grid and an obligation to the system operator (UETCL) to purchase and discharge the power generated;
- Establishment of maximum annual capacity allocations for specified technologies; and
- Use of a standardized Power Purchase Agreement (“PPA”).
Determination of Feed‐in Tariffs
The tariffs for each technology are determined using a US$/kWh levelised approach that is based on the electricity generation costs for different renewable energy sources. The inputs for tariff determination include: i) investment costs for the plant; ii) grid connection costs; iii) operation and maintenance costs; iv) fuel costs (in respect of biogas and biomass); v) interest rates for invested capital; and vi) profit margin for investors. The tariff is paid for a guaranteed period of 20 years with annual adjustments for inflation.
Eligibility of Projects
The 2012 Guidelines maintained the requirement for eligible projects to be located in Uganda and to comprise small scale renewable energy plants. Small scale energy plants are defined as energy systems of a minimum installed power capacity of 0.5MW and maximum of 20MW. The 2012 Guidelines further provide that the energy plant may include additional capacity resulting from modernisation, repowering and expansion of existing sites, but excluding existing capacity and on condition that the additional generating capacity is ring‐ fenced.
An eligible project must fall under the priority renewable technologies designated for Phase 2 of the REFIT. Under the 2012 Guidelines these include: i) small hydro power; ii) geothermal power, iii) bagasse power; iv) land fill gas power v) biogas; vi) biomass/municipal solid waste; and vii) wind. The 2012 Guidelines have eliminated a further category of technologies for which the levelised cost of energy is deemed significantly above the avoided cost, which were in the previous 2010 Guidelines.
Eligible projects under the REFIT remain subject to all other technical, legal and regulatory requirements under the various laws and regulations applicable to energy projects. In addition, applicants are required to post a performance bond, which is released upon achievement of the commercial completion date. However, to reduce the overall project processing time, a REFIT application can be processed concurrently with the required application for an ordinary generation licence.
The GET FiT Program
In a development that that has given a boost to the use of feed‐in tariffs as an investment incentive, a group of international financial institutions has developed the Global Energy Transfer Feed in Tariff Program (GET FiT Program) as a mechanism to support countries pursuing climate resilient low‐carbon development. The GET FiT program has been implemented in Uganda in conjunction with ERA under a pilot scheme that is covering only a limited number of projects which are selected using processes outside the REFIT framework. Participating projects are given the benefit of a premium payment that is above the current REFIT levels.
In addition to the premium payment, eligible projects do also benefit from other advantages that are more broadly speaking also a product of the country’s energy policy, which are: the availability of standardized documentation, a long-term off-take agreement and government support in putting in place transmission infrastructure required to connect the power plant to the grid.
The successful implementation of the GET FiT program increasing participation in renewable power generation also provide practical lessons for the continued improvement and determination of appropriate incentives for investment in renewable energy.
On the whole, Uganda has demonstrated a commitment to the implementation of the REFIT as an incentive for increased investment in renewable energy sources. It has spent some time endeavouring to streamline the applicable framework.
The standardisation of documentation for the GET Fit Program has also had the positive effect of providing templates that have been a relatively decent starting point for the negotiation of larger power projects and for the development of standard templates for other sources of energy in addition to hydro. With each passing project, lessons learnt will also contribute to efforts to further streamline the approach to risk-allocation in the current standard documentation and build on the incentive at hand.
The information contained in this review is for general guidance and not a substitute for the need to get appropriate professional advice. If you require further information, please write to your usual contact person at Mukumbya Musoke Advocates or Julius M. Musoke